Sears Holdings Corp (SHLD) Is Hanging By a Thread

Sears stock - Sears Holdings Corp (SHLD) Is Hanging By a Thread

Source: Mike Mozart via Flickr

It wouldn’t be hyperbole to say Sears Holdings Corp (NASDAQ:SHLD) has been one of the most shocking disappointments of the last decade. Although the advent of e-commerce has inarguably made life tough on all brick-and- mortar retailers, the once-iconic retailer has not only been powerless to resist it, it has been fanning its own bearish flames. The result? Sears stock is down 90% from its 2007 peak, and still within striking distance of new multi-year lows.

Sears Stock (SHLD) Is Hanging By a Thread

It also wouldn’t be hyperbole to say even the last of the faithful SHLD owners are getting fed up with a one-page business plan … sell good assets to prop up initiatives that perpetually lose money.

This coming Thursday morning’s Q2 report may finally be the one that prompts the last of the optimists and insiders to acknowledge what everybody else seems to already know. That is, Sears is broken beyond repair, and none of the fixes address the core retailing problem the company faces.

Sears Earnings Preview

Per the latest looks, Sears Holdings is expected to post a loss $3.48 per share on sales of $5.43 billion for its second fiscal quarter of 2016. Both are worse than the year-ago numbers, when the retailer reported a loss of $2.40 per share and $6.21 billion in sales.

If the top-line numbers roll in as weak as expected, they’ll extend more than a decade-long streak of falling quarterly year-over-year revenue comparisons. The bottom line hasn’t been any more impressive though, with any seeming year-over-year improvement mostly the result of one-time costs or benefits.

It has been a painful story for some onlookers to watch unfurl. Things have been lackluster ever since hedge fund manager Eddie Lampert bought K-Mart out of bankruptcy and then immediately merged it with a struggling-but-viable Sears in 2004. From the beginning, he had a hand in the management of the two different but linked retailers, without being able to relate to the typical K-Mart/Sears customer. But, when he named himself CEO in 2013, the implosion accelerated.

It may be too late to steer the struggling retailer, or Sears stock, out of the ditch.

Sears Stock: Three Things to Think About

While Sears stock has become something of a case study of what not to do in retailing, three factors are weighing on investors’ minds more than any other are at this time.

1. EBITDA: In most of the last few quarters, Sears has touted that its EBITDA loss has been getting smaller. And, on an absolute basis, this is true. There’s more to the story, however.

The reason the EBITDA loss has been shrinking stems from the fact that through the sale of the company’s real estate and/or store closures, the entire operation is shrinking, thus shrinking Sears ability to book bigger EBITDA losses. As a percentage of total sales, the EBITDA loss is holding pretty steady at 2.3%.

2. Electronic, Tires and Appliances: As much as Sears has tried to improve its omnichannel presence by melding in-store and digital shopping (and has done a good job with it), it has not stopped the bleeding on all other fronts. If anything is going to save Sears now, it’s going to be on the back of the company’s entry and re-entry into new product categories.

One of those categories is a play on electronics, leveraging the explosion of the HDTV market and smart appliance market by branding them with the familiar Kenmore name. Sears unveiled this new line along with DieHard tires in June. It’s too soon to judge the impact this strategy will have, but all eyes are on it because the company doesn’t have much ammo left.

The re-entry into the appliance market is also a must-win game for Sears. In May, it unveiled a new small-footprint appliance store concept the company is hoping will be focused enough compete in the crowded space.

3. Liquidity: It’s a perennial discussion, but deservedly so — does Sears have enough cash and credit to see the turnaround effort through (if it is indeed going to work)?

As of the end of the first quarter, Sears was down to $286 million in the bank and had just posted a $471 million loss. The recently completed second quarter will likely result in a similar loss, begging one key question … how does Eddie Lampert plan on continuing to pay the bills?

Credit is one way. The company explained it had $265 million worth of credit available at the end of Q1, and could monetize up to $300 million worth of assets if need be. There’s a very good chance the remainder of the credit facility has been tapped in the meantime though, and each time it sells an asset, the company crimps its ability to create much-needed profits.

Bottom Line for SHLD

For better or worse, most individual investors have long given up on SHLD, shedding their Sears stock out of sheer frustration. Most of them now simply keep tabs on SHLD stock out of the same mindset one has when they can’t look away from a train wreck; the amount of devastation is amazing.

Whatever the response to the numbers this time around is, just bear in mind Lampert has been using the term “transformation” since 2008. So far, none of the transformation plans have worked even though they all sounded brilliant when first unveiled.

The company needs a win, badly.

As of this writing, James Brumley did not hold a position in any of the aforementioned securities.

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